SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(D) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported): February 1,
2010
NEOSTEM,
INC.
(Exact
Name of Registrant as Specified in Charter)
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Delaware
(State
or Other Jurisdiction of Incorporation)
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0-10909
(Commission
File
Number)
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22-2343568
(IRS
Employer Identification No.)
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420 Lexington Avenue, Suite
450, New York, New York 10170
(Address
of Principal Executive Offices)(Zip Code)
(212)
584-4180
Registrant's
Telephone Number
Check the
appropriate box below if the Form 8-K filing is intended to simultaneously
satisfy the filing obligation of the registrant under any of the following
provisions (see General Instruction A.2. below):
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Written
communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
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Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
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Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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Item 7.01.
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Regulation
FD Disclosure.
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Beginning
in 2009, the Company expanded its operations into China and completed its
acquisition of a controlling interest in Suzhou Erye Pharmaceuticals Company
Ltd., or Erye, and as a result the Company has transitioned into a
multi-dimensional international biopharmaceutical company with product and
service revenues, global research and development capabilities and operations in
three distinct business units: (i) U.S. adult stem cells, (ii) China adult stem
cells, and (iii) China pharmaceuticals, primarily including
antibiotics. The Company is furnishing the following description of
its business which has been updated to reflect the aforementioned
transition:
BUSINESS
Overview
NeoStem,
Inc. was incorporated under the laws of the State of Delaware in September 1980
under the name Fidelity Medical Services, Inc. and commenced operations in our
current line of business in January 2006.
In 2009,
through our expansion efforts within China and with the acquisition of a
controlling interest in Erye, we transitioned into a multi-dimensional
international biopharmaceutical company with product and service revenues,
global research and development capabilities and operations in three distinct
business units: (i) U.S. adult stem cells, (ii) China adult stem cells, and
(iii) China pharmaceuticals, primarily including antibiotics. These business
units are expected to provide platforms for the accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
In the
U.S. we are a leading provider of adult stem cell collection, processing and
storage services enabling healthy individuals to donate and store their stem
cells for personal therapeutic use. Similar to the banking of cord blood,
pre-donating cells at a younger age helps to ensure a supply of one’s own stem
cells should they be needed for future medical treatment. Our current network of
U.S. adult stem cell collection centers is focused primarily on the Southern
California and Northeast markets. Our goal is to expand our coverage to ten
centers by the end of 2010. In addition to our services, we are conducting
research and development activities on our own and through collaborations in
pursuit of diagnostic and therapeutic applications using adult stem cells,
including applications using our VSEL TM
technology, with regard to very small embryonic-like stem cells, which we
license from the University of Louisville.
In 2009,
we began several China-based, adult stem cell initiatives including: (i)
creating a separate China-based stem cell operation, (ii) constructing a stem
cell research and development laboratory and processing facility in Beijing,
(iii) establishing relationships with hospitals to provide stem cell-based
therapies, and (iv) obtaining product licenses covering several adult stem cell
therapeutics focused on regenerative medicine. In 2010, we expect to begin
offering stem cell banking services and certain stem cell therapies to patients
in China, as well as to foreigners traveling to China seeking medical treatments
that are either unavailable or cost prohibitive in their home
countries.
2
The
cornerstone of our China pharmaceuticals business is the 51% ownership interest
we acquired in Erye in October 2009. Erye was founded more than 50 years ago and
represents an established, vertically-integrated pharmaceutical business.
Historically, Erye has concentrated its efforts on the manufacturing and
distribution of generic antibiotic products and has received more than 160
production certificates from the State Food and Drug Administration of China, or
SFDA, covering both antibiotic prescription drugs and active pharmaceutical
intermediates. Erye’s revenue for 2009 was in excess of $60 million on an
unaudited basis.
Our three
business units are expected to provide platforms for accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
Adult
Stem Cell Business in the U.S.
Stem
cells are very primitive and undifferentiated cells that have the unique ability
to transform into many different cells, such as white blood cells, nerve cells
or heart muscle cells. We only work with adult (and not embryonic) stem cells.
Adult stem cells are found in the bone marrow, in peripheral blood and in
umbilical cord blood. For over 40 years physicians have been using adult stem
cells to treat various blood cancers, but only recently has the promise of using
adult stem cells to treat a myriad of other diseases begun to be
realized.
Within
the adult stem cell classification, the use of cells is either autologous,
meaning donor and patient are the same, or allogeneic, meaning donor and patient
are different. The use of allogeneic stem cells requires the identification of a
matching donor, which can result in added costs, critical time delays or may
never occur. Even if a matching donor is identified, the use of allogeneic stem
cells introduces the risk of “graft vs. host disease” requiring
immunosuppression drugs for extended periods following transplantation.
Accordingly, our current stem cell programs are based exclusively on adult stem
cells for autologous use as we believe that adult stem cells hold the greatest
promise for therapeutic innovation.
We are
developing our business in the adult stem cell field to capitalize on the
increasing importance that adult stem cells may have in regenerative medicine,
with an initial focus on the delivery of therapies for cardiac, orthopedic,
wound, cosmetic and dermatologic indications.
We are a
leading provider of adult stem cell collection, processing and storage services
in the U.S., enabling healthy individuals to donate and store their stem cells
for personal therapeutic use. Similar to the banking of cord blood, pre-donating
cells at a younger age helps to ensure a supply of autologous stem cells should
they be needed for future medical treatment. Our current network of U.S. adult
stem cell collection centers is primarily focused on the Southern California and
Northeast markets. Our goal is to expand our coverage to ten markets by the end
of 2010. Commercial stem cell processing and storage services are provided to us
nationally, on an exclusive basis, by Progenitor Cell Therapy LLC, or PCT,
utilizing current good manufacturing practices, or cGMP, standards.
3
Our
process for collecting adult stem cells for autologous use involves the
administration of a mobilizing agent prior to collection, allowing the migration
of stem cells from bone marrow to peripheral blood. Once the stem cells have
reached the bloodstream, an individual goes through a safe and
minimally-invasive procedure called “apheresis,” similar to donating platelets,
at one of the collection centers in our network. Then, the stem cells are
processed and stored under cGMP standards. Our proprietary process does not
change or alter the underlying cells and does not require expansion
technology.
We
believe that individuals will view the ability to pre-donate and store
autologous adult stem cells for future personal therapeutic use as a valuable
part of a “bio-insurance” program. The benefits of pre-donation include: having
a known supply of autologous stem cells rather than an uncertain supply of
compatible allogeneic stem cells; autologous stem cells may be compromised once
a patient becomes sick; and the quantity and quality of stem cells generally
diminish with age. This perceived value of pre-donation should increase as
additional indications for stem cell-based therapies are developed.
We have
initiated a marketing and sales campaign, individually and through
collaborations, for the purpose of educating physicians and potential clients on
the benefits of adult stem cell collection and storage. Our strategy is to work
with our established collection centers to market in their communities and to
build new alliances and partnerships. Utilizing our new laboratory facility in
Cambridge, MA, which also will have an adult stem cell collection center, we
continue to build awareness with Boston-area academic institutions that are
researching and treating with adult stem cells.
Our stem
cell banking services generate revenue from a combination of fees paid upfront
and over time, by both collection centers and individual clients. We plan to
grow the client base at each of our centers, and add new centers in other
strategic metropolitan areas. Additional initiatives to drive private sector
revenue growth include:
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collaborations
with high profile medical centers and academic institutions involved in
research and clinical trials relating to adult stem
cells;
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services
in the U.S. targeted for “medical tourism” designed to access stem cell
therapies available outside the U.S.;
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partnerships
with executive health programs, wellness physicians, concierge medical
programs, medical spas and first responder groups;
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initiatives
with cord blood companies, tissue banks and pharmaceutical
companies;
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support
for The Stem for Life
Foundation, which promotes public awareness, funds research and
development and subsidizes stem cell collection and storage
programs;
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storage
of excess stem cells collected from bone marrow transplant donors;
and
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processing
and isolation of adult stem cells for research and diagnostic
use.
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4
While
many individuals could potentially benefit from having a supply of their stem
cells available for personal therapeutic use, our initial targeted customer
niches include:
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individuals
with a family history of serious diseases;
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individuals
at high risk for burns, wounds and other trauma, such as first
responders;
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individuals
at occupational risk from prolonged radiation or chemical exposure, such
as healthcare providers, laboratory personnel and nuclear power plant
workers;
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wellness,
cosmetic and anti-aging focused individuals; and
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athletes
and others who could benefit from regenerative therapies.
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To
further drive our stem cell initiatives, we will continue targeting key
governmental agencies, congressional committees and not-for-profit organizations
to contribute funds for our research and development programs. In October 2008,
we were advised that we would receive federal funding from the Department of
Defense to evaluate the potential use of adult stem cell-based therapy for wound
healing, currently anticipated to be in the approximate net amount of $681,000,
and in September 2009, we were notified of an award of a Grand Opportunities
grant in the amount of $108,746 from the National Institutes of
Health.
VSELTM
Technology and Other Therapeutic Technologies
We are
engaged in research and development of new therapies based on very small
embryonic-like stem cells, or the VSEL TM
technology, with the University of Louisville Research Foundation, or ULRF and
have a worldwide exclusive license to the VSEL TM
technology. Research by a group headed by Dr. Mariusz Ratajczak, M.D., Ph.D.,
who is the head of the Stem Cell Biology Program at the James Graham Brown
Cancer Center at the University of Louisville and co-inventor of the VSEL TM
technology, and others, provides compelling evidence that bone marrow contains a
heterogeneous population of stem cells that have properties similar to those of
an embryonic stem cell. These cells are referred to as very small embryonic-like
stem cells. This finding opens the possibility of achieving the positive
benefits associated with embryonic stem cells without the ethical or moral
dilemmas or certain of the potential negative effects associated with embryonic
stem cells. Of even greater potential is the ability to obtain these stem cells
for autologous use.
We have a
sponsored research agreement, or an SRA, with ULRF, pursuant to which we agree
to support further research in the laboratory of Dr. Ratajczak. In return for
supporting additional research relating to the VSEL TM
technology to be carried out in the laboratory of Dr. Ratajczak as principal
investigator, we will receive the exclusive first option to negotiate a license
covering the research results.
Recent
studies conducted by us in collaboration with the University of Louisville have
confirmed that significant quantities of very small embryonic-like stem cells
can be obtained from the peripheral blood of humans following stimulation with
granulocyte-colony stimulating factor, commonly known as Neupogen TM. Dr.
Ratajczak’s group at the University of Louisville has published preliminary work
that would indicate that these stem cells have a role in cardiac regeneration
and may help identify those at risk for cardiovascular disease. In addition,
very small embryonic-like stem cells have been shown to increase in numbers in
the peripheral circulation following acute myocardial infarction and other
stress inducing events in experimental animals and in humans. Thus, very small
embryonic-like stem cells may have significant potential to repair degenerated,
damaged or diseased tissue, or the three “Ds” of aging. With our existing
banking network, we have the ability to collect and store very small
embryonic-like stem cells from individual donors, setting the stage for their
future use in personalized regenerative medicine.
5
In
addition to the research we are funding in Dr. Ratajczak’s laboratory at the
University of Louisville, we are in discussions with other researchers to
generate data relating to other clinical applications of very small
embryonic-like stem cells, that could include neural, cardiac, ophthalmic and
bone regeneration, to expand our research efforts and maximize the value of this
technology.
To
facilitate our independent research and development efforts, we opened an 8,000
square foot, state-of-the-art facility at the
Riverside Technology Center in Cambridge, Massachusetts, or the
Cambridge Laboratory. In the near term, our efforts will focus on expanding the
current VSEL
TM technology know-how and working with other adult stem cell
technologies by performing detailed characterization, purification and expansion
of stem cells. Furthermore, at the Cambridge Laboratory we are characterizing
and developing various adult stem cells, including VSEL
TM technology, for therapeutic and diagnostic purposes.
Specifically, the use of stem cells as a diagnostic tool to understand aging has
not been sufficiently explored as a means to improve current therapies and to
test new therapies. To address this unmet need, we intend to create a stem cell
screening panel, known as a biomarker screening panel. This antibody-based test
would simultaneously quantify several important stem cell populations that are
known to be circulating in peripheral blood, including very small embryonic-like
stem cells. This biomarker screening panel would enable researchers to assess
the relative wellness of an individual by comparing their existing stem cell
profile to an age-adjusted reference of expected, or normal, stem cell levels.
The Cambridge Laboratory will also support the planned development of a
commercial process that we expect will facilitate the separation of very small
embryonic-like stem cells from blood, enabling us to create high-throughput,
cell-based assays for use in pharmaceutical and nutraceutical
research.
We also
are engaged in licensing new adult stem cell-based therapies that we plan to use
to commercialize innovative therapeutic applications. Several recent examples
include:
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In
February 2009, we entered into a License Agreement with Vincent Giampapa,
M.D., F.A.C.S. pursuant to which we acquired a world-wide, exclusive
license to certain innovative stem cell technology and applications for
cosmetic, facial and body procedures and skin
rejuvenation.
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In
April 2009, we entered into a License Agreement with Vincent Falanga,
M.D., pursuant to which we acquired a world-wide, exclusive license to
certain innovative stem cell technology and applications for wound
healing.
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6
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In
May 2009, we entered into an agreement with Promethean Corporation, which
has developed, through its subsidiary, Ceres Living, Inc., and in
connection with a leading nutritional laboratory and our scientists and
Advisory Board members, AIO Premium Cellular Health, a liquid nutritional
supplement based on certain nutraceuticals which have been shown to
optimize stem cell functions. In exchange for a license to our scientific
and medical publications, we receive a royalty on sales of AIO Premium
Cellular Health and sales lead for the collection business. Ceres is paid
a referral fee for adult stem collections generated by Ceres’ referral
network. Additionally, the Stem for Life
Foundation receives a royalty on sales of AIO Premium Cellular
Health and sales leads for the collection
business.
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Adult
Stem Cell Business in China
We
believe that, in China, we can accelerate research, the development of stem
cell-based therapies, and the creation of intellectual property positions in the
stem cell field because of China’s regulatory and scientific environment and its
culture, which are more readily accepting of stem cell-based therapies.
Additionally, China has a large population with a rapidly growing middle and
upper class who are interested in regenerative medicine and can afford such
services. Accordingly, in 2009, we expanded our operations and markets to
include China through the creation of a separate stem cell business
unit.
Our China
stem cell-based initiatives will be led by U.S. researchers and physicians in
collaboration with experts in China for each clinical application to be pursued.
We believe that this collaborative approach, and our expansion into China, will
create commercial, financial and scientific opportunities that, ultimately, will
generate increased revenues for us.
Our
current stem cell-based initiatives in China include:
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developing
a pipeline of regenerative medicine therapies, initially focused on
orthopedic conditions;
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developing
wellness, cosmetic and anti-aging applications;
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participating
in the medical tourism market for regenerative medical
treatments;
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establishing
a network of collection, processing and storage facilities;
and
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engaging
in research and development designed to improve and expand our service and
product offerings both in the U.S. and in
China.
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Because
certain PRC regulations currently restrict foreign entities from holding certain
licenses and controlling certain businesses in China, we have created a wholly
foreign-owned entity, or WFOE, NeoStem (China), to implement our expansion
initiatives in China. Additionally, to comply with China’s foreign investment
regulations with respect to stem cell-related activities, these business
initiatives in China are conducted via two Chinese domestic entities, Qingdao
Niao Bio-Technology Ltd., or Qingdao Niao, and Beijing Ruijieao Bio-Technology
Ltd., or Beijing Ruijieao, that are controlled by the WFOE through various
contractual arrangements. See “PRC Corporate Legal Structure”
below.
7
Orthopedic
Therapies
In order
to advance our regenerative medicine business in China, in March 2009, we
acquired an exclusive license for Asia to use an innovative process that expands
a patient’s own adult stem cells to treat a variety of musculoskeletal diseases.
The licensed procedure, Regenexx TM, has
been developed by a Colorado-based company, Regenerative Sciences, Inc., or RSI.
The Regenexx TM
procedure uses autologous mesenchymal stem cells extracted from bone marrow for
the treatment of various orthopedic conditions, including osteoarthritis,
meniscus tears of the knee, avascular necrosis and bulging lumbar discs. In
addition, our agreement with RSI includes consulting services to be provided by
RSI to us in the area of stem cell-based orthopedic therapies for the Asia
market. We believe that the integration of our peripheral blood collection
process into the Regenexx TM
procedure will enhance its marketability.
To
provide orthopedic-related stem cell-based services, we intend to establish a
network of hospitals to offer these orthopedic treatments in China. We recently
established a collaboration with
Shandong Wendeng Orthopedic Hospital, or Wendeng Hospital,
which will be the first of such hospitals. In June 2009, Qingdao Niao entered
into a five-year cooperation agreement with Wendeng Hospital to treat
patients and conduct clinical research regarding the application of autologous
stem cells for the treatment of a variety of orthopedic conditions.
Wendeng Hospital is considered to be one of the leading speciality
orthopedic hospitals in China, with close to 90% of its inpatient capacity
dedicated to orthopedic cases. Physician and laboratory personnel have completed
training at RSI and operations are scheduled to begin at Wengdeng Hospital
in the first quarter of 2010.
Wellness,
Cosmetic & Anti-Aging Applications
We are
developing a portfolio of products and therapies, including stem cell-based
therapies, health supplements and nutraceutical products, that we intend to
offer for wellness, cosmetic and anti-aging applications. One of the key initial
therapies is anticipated to be the autologous adult stem cell-based skin
rejuvenation therapy that we in-licensed from Vincent Giampapa, M.D., in
February of 2009.
The
license agreement with Dr. Giampapa is intended to advance our regenerative
medicine business in the U.S. and China by our acquisition of a world-wide,
exclusive license to certain innovative stem cell technology and applications
for cosmetic facial and body procedures and skin rejuvenation. This supplements
a three-year agreement that Dr. Giampapa entered into with us in January 2009
where he agreed to provide us with consulting services in the anti-aging area.
In collaboration with Dr. Giampapa, we intend to develop and launch a range of
cosmetic and anti-aging applications in China.
These
therapeutic applications are anticipated to be provided, initially, by Qingdao
Niao, one of the VIEs, at the facilities at the Qingdao Second Sanatorium of
Jinan Military Command, or the Second Sanatorium, pursuant to a three-year
cooperation agreement entered into in June 2009. As both a leading comprehensive
hospital within the military’s healthcare network and one of the principal
healthcare centers in charge of ensuring the well-being of senior and retired
military officials in China, the Second Sanatorium is a key service provider
within the domestic anti-aging and cosmetics arena. We intend to offer, through
the Second Sanatorium, stem cell-based therapies for a variety of medical
conditions and diseases as well as anti-aging and cosmetic uses. A section of
the hospital dedicated to this program is undergoing renovation, which we expect
to be completed at the end of the first half of 2010, to enable such therapies
to be provided.
8
Consulting
and Royalty Agreement
In June
2009, we signed an agreement, or the Network Agreement, with Enhance BioMedical
Holdings Limited, or Enhance BioMedical, a Shanghai corporation and subsidiary
of Enhance Holding Corporation, a multinational conglomerate with businesses in
various market sectors including healthcare. Pursuant to the Network Agreement,
Enhance Biomedical will help us develop an adult stem cell collection and
treatment network using our proprietary stem cell technologies in Shanghai and
Taiwan as well as the Chinese provinces of Jiangsu, Zhejiang, Fujian, Anhui and
Jiangxi, or the Network Territory. Enhance BioMedical has healthcare
provider relationships with numerous hospitals and doctors in the
Network Territory. It also operates the Anti-Aging and
Prevention Medical Center in Taipei, Taiwan, with facilities focused
on stem cell research and development and anti-aging therapies. As of January
15, 2010, Enhance BioMedical was the beneficial owner of approximately 19.4% of
our common stock.
The
Network Agreement is a ten-year, exclusive, royalty bearing agreement pursuant
to which we will provide Enhance BioMedical with the training, technical, and
other assistance required for it to offer stem cell-based therapies. Subject to
certain terms and conditions, the Network Agreement is renewable for a
subsequent ten-year term at the option of Enhance BioMedical. This agreement
also gives us the option, until June 2014, to acquire up to a 20% fully diluted
equity interest in Enhance BioMedical. We will receive certain milestone
payments as well as be entitled to a stated royalty on Enhance BioMedical’s
revenues derived from these stem cell-based therapies. Under the Network
Agreement, Enhance BioMedical has the exclusive right to utilize our proprietary
adult stem cell technologies identified by us to provide adult stem cell
services and therapies in the Network Territory.
In the
second quarter of 2010 we expect Enhance Biomedical to launch cosmetic and
anti-aging therapies in Taiwan under our Network Agreement.
Medical
Tourism
“Medical
tourism” is defined as the process of travelling from home for treatment abroad
or elsewhere domestically. A large segment of the individuals participating in
medical tourism seek access to medical therapies not currently available or
affordable in their home countries. The World Bank estimates that medical
tourism will be a $10 billion industry by 2011. In 2007 alone, 750,000 Americans
traveled outside the U.S. to obtain medical treatment, a number which is
expected to increase to 6 million by 2010.
9
Since our
inception, we have been building relationships with physicians in the U.S. and
abroad who have developed advanced therapies using autologous stem cells. China,
specifically, is fast emerging as a desirable destination for individuals
seeking medical care in a wide range of medical specialties, including
cardiology, neurology, orthopedics and others. As a result, a number of leading
private and government hospitals in major Chinese cities have established
medical tourism departments to provide treatment to international patients using
advanced Western medical technology and techniques, including stem cell-based
therapies. In addition to capitalizing on this trend as a potential driver for
our collection and storage business, we plan to work with specialty hospitals
and physicians in China to make stem cell-based therapies available for these
medical tourism patients.
Collection,
Processing and Storage Services
We are
extending our technical and operating expertise to China to offer adult stem
cell collection services through a network of centers within existing or
newly-developed medical facilities.
In order
to accelerate the establishment of a world-class storage facility in China, we
are negotiating the terms of a project management agreement with PCT for a
“turn-key” cGMP-compliant stem cell processing and storage operation in Beijing.
To this end, in May 2009, Qingdao Niao leased space from Beijing Zhong-guan-cun
Life Science Park Development Corp., Ltd. for a facility, or the Beijing
Facility, that will be equipped to provide comprehensive adult stem cell
collection, processing and storage capabilities, and a laboratory to support a
number of our therapeutic programs, including the orthopedic program at
Wengdeng Hospital.
Research
and Development
In
addition to supporting the processing and storage activities at the Beijing
Facility, the laboratory will provide a state-of-the-art venue for expanded
adult stem cell-related research and development activities in China. We are
collaborating with experts in China to expand our intellectual property
positions in the stem cell field and develop adult stem cell-based therapies for
the U.S. and broader China markets. These efforts will be dedicated to the
research and development of our stem cell technology and its application to a
number of therapeutic programs, initially including diabetes and
anti-aging.
In July
2009, NeoStem (China) entered into a cooperation agreement with our China
consultant, Shandong Life and Science Institute, or SLSI, to assist in the
formation of a not-for-profit organization required under PRC law, to organize
and conduct various stem cell-based clinical trials in collaboration with
specialty hospitals. This initiative was funded by NeoStem (China) in the amount
of approximately $730,000.
10
Pharmaceutical
Business in China — Erye
We
believe that China currently affords a unique opportunity to grow our revenues
on an accelerated basis. In order to enter this market, we completed the Merger
on October 30, 2009, the net effect of which was the acquisition by us of a 51%
ownership interest in Erye. Our current senior executive management team at
Erye, Mr. Shi and Madame Zhang, joined Erye in 1998, in conjunction with others
bought it from the government in 2003 and, in the years that followed,
transformed it into a profitable private enterprise. Erye had approximately 739
employees as of December 31, 2009, of which approximately 536 were
full-time.
Erye was
founded more than 50 years ago and represents an established,
vertically-integrated pharmaceutical business, focused primarily on the
manufacturing and sale of antibiotics. Historically, Erye has concentrated its
efforts on the manufacturing and distribution of generic antibiotic products and
has received more than 160 production certificates from the SFDA covering both
antibiotic prescription drugs and active pharmaceutical intermediates, or APIs.
Erye’s revenue for 2009 was in excess of $60 million on an unaudited
basis.
Industry
China has
a large population with a rapidly growing demand for pharmaceutical drugs and
has committed to providing increased governmental insurance to provide a larger
segment of the population greater access to pharmaceuticals. The antibiotics
market in China was approximately $8.8 billion in 2007, with an annual average
growth rate of approximately 24 percent for the previous three years. The
overall pharmaceuticals market is forecasted to triple in size by 2013, becoming
the third largest drug market in the world behind the U.S. and
Japan.
In early
2009, the PRC government announced that improving healthcare for its citizens
would be a major priority and China’s State Council approved the spending of
$124 billion on its healthcare system between 2009 and 2011. This spending
initiative, coupled with a population approaching 1.4 billion, makes China a
large market opportunity for pharmaceutical drugs. As part of this initiative,
China has created the New Rural and Urban Cooperative Medical Insurance System.
More than 60% of the drugs produced by Erye are covered under this new medical
insurance system.
Products
Erye
offers a broad portfolio of anti-infective drugs, with no single product
accounting for more than 10% of total revenues. In 2008, seven of the top 20
antibiotics used in Chinese hospitals were products offered by Erye. Erye’s top
five products, by revenue, for the first nine months of 2009, are set forth in
the following table:
11
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Product
Name
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Product
Type
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Approximate
Revenue
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(In
Millions)
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Acetylspiramycin
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API
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$4.0
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Oxacillin
Sodium
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API
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$3.2
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Mezlocillin
Sodium
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Injectible
Finished Product
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$3.1
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Amoxicillin/Sulbactum
Sodium
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Injectible
Finished Product
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$3.0
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Cefoperazone/Sulbactum
Sodium
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Injectible
Finished Product
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$2.4
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Erye is
currently focused on bringing more differentiated and higher-margin product
offerings to its portfolio. Progress toward this goal has been demonstrated in
an increase in gross margin to 33.9% for the nine months ended September 2009
compared to 30.6% for the nine months ended September 2008.
Distribution/Customers
In China,
consumers generally receive prescription drugs through hospitals. Antibiotics
are distributed almost exclusively through hospitals. Since pharmaceutical
manufacturers in China are not permitted to sell directly to hospitals, it is
essential to have an effective and extensive distributor network. Erye’s
distributor network covers all of mainland China’s provinces and municipalities
and generates sales principally through three channels:
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exclusive
distributors of prescription drugs, referred to as “co-sales teams”: this
distribution channel handles the clinical promotion and distribution of
differentiated, higher-margin product lines, within exclusive
province-based and municipality-based territories;
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•
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non-exclusive
distributors of prescription drugs: this distribution channel is devoted
to selling established product lines that require little, if any, clinical
promotion; and
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exclusive
distributors of APIs: this distribution channel is devoted to selling APIs
to large pharmaceutical manufacturers
nationwide.
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Erye has
an internal sales and marketing team of more than 40 individuals that supervise
the distributor network, assist with clinical promotions and manage hospital
relationships. Many of Erye’s sales executives have long-term experience in
pharmaceutical sales and previously held sales positions with state-owned
pharmaceutical companies, where they established long-standing relationships
with large distribution centers in several key regions nationwide and, in
particular, within the Yangzi River Triangle.
Production
Facilities
Erye
currently operates a production facility in the City of Suzhou, containing
approximately 33,490 square meters of offices, dormitories, a food court,
warehouse and production facilities, including eight (cGMP) production lines
certified by the SFDA, workshops and laboratory areas.
In 2005,
the PRC government issued a mandate requiring the relocation of many of Erye’s
existing manufacturing facilities. The government mandate did not require Erye
to relocate by any specific date. In order to comply with this mandate and to
meet the growing demands of its business, Erye acquired land use rights to
approximately 27 acres in the Xiangcheng District of Suzhou and, in 2007,
commenced the construction of a new, state-of-the-art production facility. This
new campus-style facility includes 12 buildings containing a total of
approximately 49,436 square meters of space, for which the external building
construction has been completed and manufacturing equipment is being assembled
and tested. The land use rights end in January of 2058.
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Erye
began transferring its operations in January 2010. The relocation will continue
as the new production lines are completed and receive cGMP certification through
2011. In January 2010, Erye received notification that the SFDA has approved
Erye’s application for cGMP certification to manufacture solvent crystallization
sterile penicillin and freeze dried raw sterile penicillin at the new facility,
which provides 50% and 100% greater manufacturing capacity, respectively, than
its existing facility. Historically, these two lines have accounted for
approximately 20% of Erye’s sales.
Once Erye
has completed the transfer of operations to the new facilities, and its new
production lines are fully operational, it will have substantially increased
capacity from the current plant, with the goal of becoming among the largest
antibiotics producers in Eastern China.
The total
cost of the new facility is estimated to be approximately $30 million, of which
approximately $16 million has been paid for through September 30, 2009. The
remaining $14 million is expected to be funded from a combination of proceeds
from this offering, an Erye line of credit and Erye’s operating cash flow. To
this end, the owners of Erye have agreed to reinvest a substantial portion of
their respective shares of the earnings of Erye to pay the costs associated with
the completion of, and Erye’s relocation to, the new production
facility.
Research
and Development — Product Pipeline
Erye
provides a well-established and capable platform and network for the
introduction of pharmaceuticals, and other health-related products, to the vast
domestic patient and consumer markets in China.
Currently,
Erye has seven new drug candidates in their pipeline, at varying stages of the
development and commercialization process. Applications for production
certificates for four of these drug candidates have been submitted and are
pending approval by the SFDA, including Adefovir capsules, Cloxacillin Sodium
(API), Clindamycin Phosphate for injection, and Omeprazole capsules (approved
November 2009). Erye also has three candidates in clinical trials that could be
considered “new drugs” in China, including Faropenem sodium (API), Faropenem
tablets and Tiopronin enteric-coated capsules.
Erye’s
recent track record for obtaining SFDA production certificates includes seven
certificates in 2007, four certificates in 2008 and four certificates in 2009
(including Omeprazole capsules).
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In
addition to research and development regarding new prescription drugs, we plan
to expand Erye’s product pipeline with health supplements and nutraceutical
products. We believe that the expansive markets in China present opportunities
for these products and that Erye already has extensive capabilities to
accelerate product distribution.
In
accordance with General Instructions B.2 of Form 8-K, the information in this
Current Report on Form 8-Kshall not be deemed “filed” for the purposes of
Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise
subject to the liability of that section, nor shall it be deemed incorporated by
reference in any filing under the Securities Act of 1933, as amended, except as
shall be expressly set forth by specific reference in such a
filing.
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SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, NeoStem has duly caused this Report to be
signed on its behalf by the undersigned hereunto duly authorized.
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NEOSTEM,
INC.
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By:
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/s/
Catherine M. Vaczy
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Name:
Catherine M. Vaczy
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Title:
Vice President and General Counsel
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Date: February 1,
2010
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